We think IWG (LON: IWG) is taking risks with its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. It is natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We notice that IWG plc (LON: IWG) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Discover our latest analysis for IWG
What is IWG’s net debt?
As you can see below, at the end of December 2020 IWG was in debt of £ 422.3million, up from £ 360.9million a year ago. Click on the image for more details. However, as it has a cash reserve of £ 71.0million, its net debt is less, at around £ 351.3million.
How strong is IWG’s balance sheet?
We can see from the most recent balance sheet that IWG had a liability of £ 2.44bn due within one year and a liability of £ 6.02bn beyond. On the other hand, he had cash of £ 71.0 million and £ 902.0 million in less than one year receivables. It therefore has liabilities totaling £ 7.48 billion more than its cash and short-term receivables combined.
This deficit casts a shadow over the £ 3.10 billion British company like a towering colossus of mere mortals. So we would be watching its record closely, without a doubt. After all, IWG would likely need a major recapitalization if it were to pay its creditors today.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
IWG has a very low debt to EBITDA ratio of 1.2 so it is strange to see low interest coverage as last year’s EBIT was only 0.16 times interest expense. So one way or another, it’s clear that debt levels are not trivial. It is important to note that IWG’s EBIT has fallen 85% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether IWG can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, IWG has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
To be frank, IWG’s EBIT growth rate and track record of controlling its total liabilities make us rather uncomfortable with its debt levels. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. We’re pretty clear that we see IWG as really pretty risky, because of the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that IWG displays 2 warning signs in our investment analysis , and 1 of them is potentially serious …
Of course, if you are the type of investor who prefers to buy stocks without going into debt, don’t hesitate to check out our exclusive list of cash-flow-growing stocks today.
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